Employee Stock Purchase Plan (ESPP)
A program letting employees buy company stock at a discount (typically 5 to 15 percent) through payroll deduction, with potentially favorable tax treatment if holding-period requirements are met.
Detailed Explanation
Section 423 ESPPs offer a discount of up to 15 percent off the lower of grant-date or purchase-date price (the look-back). Qualifying dispositions (held more than one year after purchase and more than two years after offering start) produce ordinary income equal to the discount and capital gain on the rest. Disqualifying dispositions trigger ordinary income on the full bargain element at purchase, often included on the W-2 but not always basis-adjusted on the broker 1099-B, leading to double-counted income on the return.
Key Points
- Section 423 plans allow up to a 15% discount, often off the lower of grant-date or purchase-date price (the look-back).
- Qualifying disposition: held more than 1 year after purchase AND more than 2 years after the offering start.
- Disqualifying disposition taxes the full purchase-date discount as ordinary income.
- A frequent error: the broker 1099-B reports a basis that omits the discount already taxed on the W-2, double-counting income.
- Fix the basis on Form 8949 to avoid paying tax twice on the discount.
Practical Example
Stock is $100 at the offering start and $120 at purchase; with a 15% discount you buy at $85 (15% off the lower $100). The $35 difference between $85 and the $120 purchase-date price drives the tax. On a disqualifying sale, the $35 per share is ordinary income on your W-2; your true basis becomes $120, but if the 1099-B shows $85 you must correct it on Form 8949 to avoid double taxation.
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Learn about Tax Planning & StrategyRelated Terms
Incentive Stock Option (ISO)
An employer-granted option to purchase company stock that, if held long enough, qualifies for preferential long-term capital gain treatment but creates Alternative Minimum Tax (AMT) on exercise.
Non-Qualified Stock Option (NQSO / NSO)
An employer-granted stock option that creates ordinary income at exercise equal to the bargain element, with employer-side payroll tax withholding.
Restricted Stock Unit (RSU)
A form of employer equity compensation that delivers shares (or cash equivalent) to an employee upon vesting, taxed as ordinary income at vesting.
Capital Gain
The profit realized from the sale of a capital asset such as stock, real estate, or cryptocurrency, taxed at preferential rates if held longer than one year.
Form 8949 (Sales and Other Dispositions of Capital Assets)
The IRS form used to report each individual sale or disposition of a capital asset, with totals flowing to Schedule D.
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